Tag Archives: managing pay

HR and Reward Challenges in Developing Markets – Beyond BRIC

Posted on January 20, 2010 by | 5 comments

 

Author:
Warren Heaps – Birches Group LLC

We are all hopeful that 2010 will be a better year for business than 2009. When that hoped for upturn finally takes hold, where will your company find growth?  If your company is like many others, the answer to that question points to developing markets in Africa, Asia and Latin America, where growth rates are higher and opportunities are great.

Growth is Robust
Post-recovery estimates from the IMF for 2010 indicate worldwide GDP growth of 5.7% is expected, while GDP growth in developing countries is expected to climb 9.5%.

Regional comparisons are even more dramatic:

  • Sub-Saharan Africa – 9.6%
  • Latin America & Caribbean – 10.5%
  • Middle East – 14.9%
  • Central and Eastern Europe – 1.4%
  • Euro Zone – 3.6%

As you can see from these figures, growth in the developing world is expected to be almost three times greater, on average, than in the Euro Zone.  Investors have already discovered this; according to Bloomberg Business Week, the top ten performing stock market indices since December 31, 1999 are all developing markets, ranging from 901% gain in Ukraine, to just 318% in Brazil. With potential like this, it’s not surprising that more and more companies are focusing on new markets in these regions.

HR Challenges
The landscape for operating in developing countries is different from what many companies may be accustomed to in Western Europe, the US and elsewhere in the developed world.  For HR, the most prominent challenges are in two areas – talent and reward.

The Talent Challenge
Developing country markets are smaller than big developed country markets.  Fewer employers participate in the market, and not all sectors are represented, but those that do are all vying for the same people – the best talent.  Highly educated professionals are often in short supply, especially those with advanced degrees which are often obtained in the US or Europe.  While professionals may have training and education in a particular occupation, it is very common for these individuals to switch occupations for advancement opportunities.  They become generalists rather than specialists, and switch between sectors often as well.

Leading Employers Play a Key Role
Certain employers are found in a lot of developing countries, and help to define the labor market.  These employers include companies from the banking; consumer products; oil, gas and mining; and telecom and technology sectors.  Many of these companies are global multi-nationals which have been operating in developing countries for many years, and have a lot of experience with the conditions.  The other major players are international public sector organizations.  This group includes employers such as embassies, development banks, multi-lateral agencies such as the UN, and leading international NGOs.

Know Your Competition for Talent
Many private sector companies are surprised when we suggest they consider the international public sector as part of the group of leading employers with which they compete for talent.  After all, what do oil companies or banks have to do with embassies or the World Bank?  The answer is a lot!

International public sector employers are involved in a lot of the same activities as private sector companies.  For example, an MBA graduate being recruited by a consumer goods company for a brand manager role is the ideal profile for an embassy public information officer.  The engineers that the oil sector seeks can be deployed as project managers for infrastructure development funded by the World Bank, or an NGO such as the Global Water Project.  In addition, of course, there are occupations that are common to all employers, in areas such as administration, finance, human resources, IT, etc.  The lesson is to expand your focus in developing countries to include not only companies outside your sector, but some of the relevant international public sector institutions as well.

How Can I Be Competitive?
The second significant challenge for companies in developing markets is figuring out the reward structure.  Compensation schemes are different in each country, but there are some common themes across developing countries which differ from more developed countries.  For example, the span of salary ranges is often much wider than the typical 50% to 67% often found in developed countries.  The differential from one grade to the next can vary dramatically depending on the levels — often the jump from manager to executive can be 35% or more.

Base Salary is Just the Beginning
It is quite common to provide cash allowances, such as 13th and 14th month, as well as transportation allowances or housing allowances in many countries.  In addition, in-kind benefits such as beverages or meals, transportation (commuter buses) and subsidized loans are found in many markets.  The value of allowances and in-kind benefits can be substantial, ranging up to 30% or more in some countries.

Good Market References Are Important
One way to ensure a competitive position in the market is to establish your position with reference to the leaders, using a high-quality compensation survey.  The survey should include values for base salary, cash allowances, in-kind benefits and short-term incentives.  In addition, you’ll need to be aware of the social benefits and other statutory pay practices, how pensions and insurance are provided, and how the income tax scheme influences how compensation is structured.

In Summary
Developing markets are exciting, diverse and challenging.  Human resources professionals need to become aware of the unique market dynamics in smaller developing countries, including the role of leading employers and the complexities of how rewards are provided.

Note:  Birches Group conducts total compensation surveys in 147 developing markets.  Visit our website for more information.

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Base Salary – Not So Basic!

Posted on January 6, 2010 by | 9 comments

Author:
Chuck Csizmar – CMC Compensation Group

Ever find yourself confused when asked to provide an international employee’s annual rate of pay?   Compared to the US, you will find scant uniformity between countries as to when and how monies are paid to employees, and this diversity can lead to confusion, misreporting of data and the potential for internal equity squabbles.  It is especially a concern when a US Manager attempts to hire a foreign local national without being certain of country-specific pay practices.

To a US employer, the term “annual base wage” or “annual salary” is simply the cumulative amount of payroll dollars (regular paychecks) dispensed over a twelve month cycle.  However, in many parts of the international community, it’s a bit more complicated.

Numerous countries consider statutorily required or common practice holiday (vacation) pay and Christmas (December) payments as part of what they term “basic salary” – which they report as a monthly calculation.  So what is the annual salary?

Defining Your Terms

In the US, annual salary is a common reporting term, an identifier to the company and the employee of the value paid to each position. To quote an annual salary is common practice.

The trick when considering global practices is to remember the distinction between the two annual terms:

  • Base pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed
  • Basic pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed, but including additional payments (usually in monthly increments) not directly related to the work effort

Some US companies prefer not to deal with the issue, relying instead on the US model of quoting an annual salary – then dividing by the total number of monthly payments due in order to calculate the monthly gross paycheck.

A client of mine once insisted on offering a candidate 75,000 euro, but no more for a key position.  When informed that in Belgium an extra month (13th) is common, and in fact mandated in many collective agreements, the response was “fine, as long as the total base pay isn’t higher than 75,000 euro.”

That candidate did not accept the position.

Here are a few representative examples to illustrate the diversity of practices across the globe.

  • Singapore:  While a 13th month payment (Annual Wage Supplement) is not mandated, it is common practice.  Executives typically receive 1 to 2 months pay as an additional bonus.
  • Mexico:  Companies are mandated to give employees a Christmas bonus equal to 15 days pay.  Common practice is to grant 30 days.
  • Peru:  Employees are entitled to a 13th and 14th month bonus; the 1st extra month is paid in July and the 2nd in December
  • Italy:  In December, employees are paid a Christmas bonus equal to a month’s salary.  In many contracts a 14th month’s salary is included and is paid in June.

The extra payments are not rewarding work performance, but typically provide extra monies for either vacation time or Christmas.  These practices are not commonly followed in the US.

What to do

To avoid confusion when dealing with local national employees it is helpful to talk in terms of monthly pay, the term commonly used by the employees.  No matter how many monthly payments are made, for whatever reason, simply multiply the payments to reach the annual figure.  To your international employee that is considered an annual pay entitlement, though not an annual salary as practiced in the US.

When reading compensation surveys make sure to check the definitions used; oftentimes the survey will report both an annual salary and a “guaranteed annual cash” – the latter inclusive of holiday bonuses and extra month’s pay.

Avoid setting a US-style annual salary and then dividing by the number of required payments to derive a monthly pay.  Instead, determine what you will pay on a monthly basis and multiply those payments by country-specific statutory requirements and common practice to derive (build-up) the annual salary.  It’s a bit more confusing for US companies, but it will be more meaningful for your international employees and likely save you employee relations issues down the road.

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International HR Forum Year in Review 2009 – Best of Compensation and Benefits

Posted on December 21, 2009 by | Comments Off on International HR Forum Year in Review 2009 – Best of Compensation and Benefits

This is the first of our three-part “Best of …” series, where we will feature links to our best posts on selected topics.  This part is focused on Compensation and Benefits.  Over the long holiday period between now and the new year, we will publish two more “Best of …” posts featuring articles on Expatriates and International Assignment Management, and Leadership Development and Training.

The posts below are some of the most popular ones featured on the International HR Forum.

We hope you find these summary posts to be a helpful way to explore some of the best content on our blog.

Best of Compensation & Benefits from the 2009 Archives of the International HR Forum:

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10 Rules of the Road for Your Expatriate Program – Part II

Posted on October 19, 2009 by | 7 comments

bio_400x400 Author:
Chuck Csizmar – CMC Compensation Group

Last week I posted the first five of ten “Rules of the Road” for managing your expatriate program.  I hope you enjoyed reading them.  In this post, I’ve included the five remaining rules.  Enjoy!

Rule #6: Always have a Backup Candidate
It is very important to avoid a scenario where management believes that only one person is capable of handling the assignment.  If all your plans are dependent upon one candidate, and your choice discovers this (they usually do), the assignment from that point will likely become more contentious, problematic, internally disruptive and ultimately more expensive.  You will have lost leverage when trying to apply Company policies, demands for exceptional treatment will increase, costs will rise as a result and the likelihood of equity issues with other employees will increase.

Having a second choice will enable you to more easily finalize an equitable package of terms and conditions, test the candidates’ genuine interest in the overseas assignment and lower inflated egos down to earth.

Rule #7: Do Not Play “Let’s Make a Deal”
Everyone tends to lose on this slippery slope.  The expatriate community is a small group that will eventually learn of any special deals someone received that others did not.  While the expatriate policy document should provide a “safety valve” for approved discretionary exceptions covering extraordinary circumstances, be mindful of creating precedents where the sole reason is to placate an employee (or their spouse).  This problem can be a major dissatisfier for the rest of your community.  Explore cost sharing and trade-offs with the expatriate to mitigate the perception of inequitable treatment.

Certain employees, especially those with a sales background or like temperament, may view many aspects of the assignment terms and conditions as negotiable, simply because it is in their nature to question or challenge what they consider is the Company’s “initial offer”.

A word of caution:  if the employee considers the international assignment less as a wonderful career opportunity and more as a “favor” to the Company, the warning signs should be posted that this might not be a good match.

Rule #8: Have a “Hand-Holder” in Place
Another key to a successful assignment is to provide a ‘go-to” person in the host country for the myriad questions that will crop up as soon as the assignee arrives.  Set up a local contact point for host country issues, expatriate experiences and administrative fulfillment of the assignment terms.  Insist that the assignee utilize this person, not their manager, co-workers or even well-intentioned HR people unfamiliar with the expatriate program.  This go-to person should have the authority to make decisions, to “handle” whatever the question might be.

While this sounds like an easy step do not assume that anyone would automatically take this task to heart.  Left to their own devices, host country employees often find it difficult to invest the time to help assignees understand local business conditions and culture.  Thus you need to make it someone’s responsibility.

Likewise there should be a contact person in the home country as well, a designated individual prepared to handle policy interpretations, provide advice on navigating procedures and assuming responsibility for the home administration of the assignment terms.

Rule #9: Do Not Forget That They’re out There
A successful assignment requires constant attention from both the home and host country contacts.  Communication should be frequent, as should the “check-up” calls to gauge the assignee’s temperament.  For example, does the assignee understand the COLA calculations, have any payroll or currency exchange issues arisen, is the family acclimating well, are there issues the assignee would like to discuss?  A key source of dissatisfaction for assignees and their families is a feeling of being “out in the provinces” and therefore out of touch with what is happening back at the office they have left.  Make every effort to ensure that they do not feel marginalized, taken for granted or forgotten.

Make sure the assignee has a Mentor (as compared to a hand holder) back in the home country as well, a Senior Management-level individual charged with representing the assignee’s career interests during the assignment.  This person should schedule periodic career discussions with the assignee.

Rule #10: Have an Exit Strategy
All too frequently companies are at a loss as to what to do with expatriates who have successfully completed their assignments.  It is not uncommon for assignees to leave the Company upon their return from overseas or within the following year, because either no suitable position was available in the home country or what was available was a diminished or less visible role.

After incurring the huge expense for an employee to develop deeper and broader competencies on the international stage, it is a wise business practice to pay close attention as to how best to utilize that increasingly marketable (and therefore valuable) talent when the assignment ends.  Without due care and planning the career cycle of an assignee is left as an afterthought, one that usually crops up late in the assignment;  meanwhile the assignee has been worried (and thus distracted) for a much longer period of time.

While there are no guarantees that future positions will be available back home for employees presently working overseas, the international assignment letter should at least state that the Company will attempt to secure a “mutually agreeable position of similar stature” upon completion of the assignment.  It is in the best interest of the Company and the assignee to carefully plan for a successful repatriation.

Follow though
Well, that’s my list of ten rules.  The road ahead has curves, dips and more than its share of bumps and potholes.  However, if you manage to keep these sign posts in mind (commit them to memory, post them on the wall, send and resend them to managers), the experience does not have to be an endurance course for all concerned.

You will need to keep at it though (persistence is its own reward), because there is no pill or “Easy Button” that will magically ease the journey.  There is no cure for the realities that expatriate assignments will always be costly, procedurally complex and a personal as well as professional risk for those involved.  But by adhering to your own “rules of the road” your expatriate program can reap significant benefits: lower assignment costs, business objectives achieved, satisfied employees and host management, retained and developed talent and ultimately greater overall business success.  It can be done.

More rules?
Do you have rule that I did not include in my top ten?  Please, leave a comment and share your insights with the community.

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Posted in Compensation, Expatriates, Global HR Expertise, Global Mobility Services, International Expertise, Professional Development, Repatriation

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10 Rules of the Road for Your Expatriate Program: Part I

Posted on October 9, 2009 by | 7 comments

bio_400x400 Author:
Chuck Csizmar – CMC Compensation Group

Even a properly handled international  assignment is a complex beast; the procedural morass that confuses as well as frustrates, the emotional stress placed on the assignee and family, the myriad details that could go wrong (and often do), and dealing with career risks inherent with being “out there”.  And, to top things off, the entire enterprise is extremely expensive!

Even in today’s economy, though, the need to send employees overseas remains strong, and for good reasons – skill development, setting up a new business venture, organizing an acquisition, transferring knowledge through training and development, filling a skills gap, etc.  It is more important than ever to ensure a successful assignment, since failure is very costly and potentially damaging to the business.

To help you manage your assignments successfully, I’ve put together a list of ten “rules of the road” to keep your expatriate program running smoothly.  The first five rules follow below.  Next week, I will post the other five (so watch for them!).

Rule #1 – Have a Policy and Use It
It is tempting for companies new to the international assignment experience to delay the development of written policies and procedures.  With a thought of “we only have one or two people overseas” they deal one-on-one with individual employee situations and make decisions on the spur of the moment that affect only that one assignee.  Such a practice ignores the advantage of standardized practice, and sows the seeds for future problems.

Documentation establishes standard practice, provides a managerial consistency that deflects exception requests and restricts (but does not eliminate) the “everything is negotiable” mentality.  No matter the size of your expatriate program, making ad-hoc or one-off special arrangements without broader consideration of other existing or future expatriates is always a recipe for trouble.  While attempting to placate an assignee, keep an eye that your decision does not aggravate others by creating a perceived atmosphere of special treatment.

Establishing and requiring adherence to an international assignment policy will also help the company lessen the impact of so-called “stealth expatriates”,  employees working in another country without being part of the formal mobility program.  Oftentimes, well intentioned managers with a get-it-done attitude often send people abroad without going through formal channels.  This casual approach to a complex issue usually results in a high rate of assignment failure, as well as additional complexities and the risk of costly penalties (i.e., compliance with tax and visa regulations).

Rule #2 – Require a Business Case to Justify the Expense
Your procedures should require that requesting managers be informed of all projected costs associated with an assignment before an approval will be considered.  Oftentimes a break down of these costs is buried among several budgetary line items, not readily evident to the casual observer.  An inexperienced manager is usually unaware of the true costs involved.  As a rule of thumb, an assignee with family will cost about 3 times salary per year, while an individual assignee would cost 2 times.  You should require the requesting manager to sign off on the expense projections – making their approval visible within the organization.

The business case should also demonstrate why an assignee is required (vs. a local employee).  What is the operational advantage for the business and how success would be measured?  Does the proposal show how the expense will ultimately deliver an appropriate ROI?  Soft answers such as “developing talent” and “global exposure” should rarely be included in the top tier of business justification, unless cost considerations have been relegated to a lower level of importance.

Rule #3 – Stick to Your Approval Chain of Command
Establish a clear hierarchy of who is required to approve both the assignment itself (not simply who supports the request) and the associated terms and conditions.   You should operate on the presumption that managers, especially those with a tendency to use “stealth expatriates”, should repeatedly be made aware of who this “gatekeeper” is and what the requirements are for approval.  A firm hand here will avoid repeated requests searching for someone to say “yes”, while providing an opportunity for the company to speak with one voice.

You should be cautious when dealing with demanding senior managers who support the request but in fact lack the authority to approve the assignment.  If not forced back to the Corporate Gatekeeper for adjudication and confirmation, these senior managers could potentially disrupt the process by their inadequate understanding of particulars, by confusing and aggravating the candidate (or family) with mixed messages and by agreeing to terms and conditions for which they are not authorized.

Note: Once an unauthorized  management representative commits assignment terms and conditions to an expatriate candidate, it will be difficult to correct any errors without compromising the initial goodwill established with that employee.

Rule #4 – Consider Non-Traditional Assignments
While the traditional expatriate assignment typically lasts from one to three years or more, evidence is growing that companies are increasingly using shorter assignments as a means to reduce costs, attract more candidates and reduce the failure rate.

Obviously, the shorter the assignment the lower the ultimate expense will be (taxes, allowances, gross ups, etc.).  However, shorter assignments are also more attractive to candidates who would otherwise have passed on being overseas for several years, usually for family or career reasons.  This opens up a new pool of potential candidates as well.

If the company’s goal can be defined in narrower terms (knowledge transfer, specific projects, filling a skill gap, etc.) a shorter assignment, or even a series of extended business trips might be a more reasonable strategy for the business case.

Rule #5 – Select Employees Who Will Become Good Ambassadors
Whatever the technical capabilities of the person you select for an overseas assignment it is critical that they (and their families) have the right persona for the role they will play as ad-hoc “ambassadors” for your company.  While capability of performing the assigned role is paramount, assignment failure often occurs when the assignee or members of their family are unable to adjust to living in a foreign environment.  Having a flexible nature, as well as at least a taste for adventure will go a long way in making everyone comfortable.

The assignee should live / reside as their local counterparts do, not as the expatriate is accustomed back home (style and size of house, neighborhood, distance to work, etc.).  Cultural sensitivities should be considered, so the assignee may “fit” in with like jobholders.  Your intent should not be to replace an expatriate’s home country style of living.  Working relationships sour quickly if an expatriate Manager or Director lives markedly better than the local Vice President.

Provide cultural orientations and if necessary language lessons for all family members.  Institutional differences (banking, medical care, driving, local bureaucracies, etc.) should be explained in advance.  Surprises should be minimized, as they are usually negative experiences.

Note: Simply because the locals speak English is not a reason to avoid properly preparing the expatriate for the overseas experience.

In Part II of this article, in my next post, I will discuss the remaining five rules of the road for an effective international assignment program.

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How Effective Are Your International Pay Programs?

Posted on September 22, 2009 by | 1 comment

bio_400x400Author:
Chuck Csizmar – CMC Compensation Group

Has anyone ever asked you this question?   Did you have an answer?

To clarify, the question is whether your company’s international pay plans and practices are operating the way they were intended, and whether you are satisfied with what they have delivered.

When I ask a client this question, the typical reaction is a deer-in-the-headlights return stare, followed by a puzzled frown, perhaps a cough, then – maybe – some mumbled explanation of their employee turnover  situation.

In other words, they don’t have a clue.

A Huge Missed Opportunity

Why is this question important?  The client’s reaction would be humorous if there wasn’t a cash register ringing in the background.   If the method by which you reward your employees for their performance is not working, in any country, your company is wasting money like a silently dripping faucet – or worse.   This money is draining directly from your bottom line and your program flaws are likely also causing resentment among your employees.   Such a waste is also an avoidable expense, one that you can control.  Squandering payroll dollars and upsetting your employees is a dangerous and expensive combination for any organization.

If you consider that upward of 40% to 60% of your revenue goes right back out the door in some form of employee pay (excluding benefits), then the magnitude of your vulnerability should hit home.

Management time, though is too often misdirected by worrying about whether next year’s average pay increase will be 2.5%, 3.0% or 3.5% of payroll – or whether distinctions should be made on a country-specific basis.   However, the 800 lb. gorilla in the room is not the increase percentage, but the payroll itself – that huge amount of fixed and variable pay expense already budgeted.  That is the figure that should receive the lion’s share of attention.

What do you mean by an “Effective Program”?
Each Compensation program that you have in place (or set of practices) was likely designed or intended to perform a certain function.  For example:

  • Salary Structure or pay hierarchy – to offer the opportunity to earn competitive base pay
  • Incentive Plan – to reward employees for achieving job-related objectives above and beyond their normal duties
  • New Hire / Promotional Guidelines – to staff the company with the right caliber of employees
  • Pay-For-Performance – to recognize and reward higher achieving performers for their contribution to the company

How do you know if you need to be concerned about these programs / practices?  There are signs for those prepared to look.   Some examples:

  • Poor documentation of job responsibilities:  No one likes to write job descriptions, including me, but their absence, antiquity or inaccuracy can create an environment of blurred responsibilities, grade and title inflation and over staffing.  The direct result is an increase in fixed costs.
  • Absence of a Procedures Manual:  You can not expect managers to follow a consistent company process when they have little or no guidance.   They will fill the vacuum with chaos and damaging precedents, each of which is an expensive end product.
  • Dashboard metrics not in place:  To understand success you need to measure it.  If you haven’t established criteria to track the who, how and why of your compensation programs, then you won’t be able to understand whether your programs deliver desired results or not.
  • One size fits all:  Where the company has decided that each national program should look like the one at headquarters (different country), for ease of administration and communications
  • Poor visibility of pay decisions:  Proper rewarding of good performance should be a celebration in the open sunshine, not hidden in a closet hoping the boss won’t notice.  If a manager can grant pay increases without at least one additional level of signature, then the opportunity for improper (wrong amount, wrong employees, wrong reason) pay increases will flourish.
  • Toothless Performance Appraisal Process:  If your process of rewarding employees focuses more on activity than results, if it does not measure performance, if objectives / work routines are not tied to business needs, or if the appraisal document is viewed as an administrative headache, chances are the monies coming out of that process are a) providing little motivation for future performance, and b) are viewed more as delayed compensation than true pay-for-performance.
  • Limited Reward Differentials:  If the reward difference between a high performing employee and “Joe Average” is less than 2% you’re better off to consider across-the-board increases rather than go through the painful process of actually assessing individual performance.   If your plan essentially rewards everyone (is that really pay-for-performance?), then you’re not going to have enough money to properly reward those most critical to business success.  And who do you think will leave in a huff?  Not Joe Average, that’s for sure.
  • Weak Budgetary Controls:  Is there anyone assigned to watch the compensation purse strings in your organization?   Someone to say “that’s too much” or “you can’t give that large an increase”?  Someone perhaps to limit the growth of fixed costs?  Absent the presence of limiting factors (“controls” is such a harsh word) your costs will rise, as undisciplined managers in an unstructured environment will increase pay decisions in order to be liked by their employees.

Steps to take now
So what can you do?   You can find out.   You can ask questions.   You know the warning signs now, so avoid complacency and do not simply wait for the fire alarms to ring.  Become an advocate for systemic change, for policies and processes that improve the way your company rewards its employees.

By the way, have your internal audit folks ever scheduled your compensation programs for a checkup?  If so, it’s usually the HR documentation of processes that get a look, not whether those processes are effective or are even damaging the business.  They tend to look in the wrong direction.

Will a comprehensive review of your pay programs ensure that you will save money?  Improve your pay programs?  Improve retention and morale?  Unfortunately, there is an “it depends” answer to those questions.  The review will highlight your weaknesses and vulnerabilities, and show you the pathway to efficiency, cost savings and the effective use of your payroll dollars.  But by itself a comprehensive review can do little more than show you the way.   To reap success from your study, Management must be willing to make critical decisions that differentiate pay on the basis of employee value and performance.

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Global Salary Budgeting – Smart Approach or Misguided Shortcut?

Posted on August 23, 2009 by | 4 comments

heaps_warren1Author:
Warren Heaps – Birches Group LLC

It’s getting near to the time of year when companies start to draw up budgets for next year.  One of the most important numbers in the exercise is how much to budget for growth on the salary line.  Some organizations assume that making an assumption for salary growth globally based on the figures used in the headquarters country is a good solution.  After all, it’s easy to just take one number and apply it around the world.  Such an approach, however, is flawed.

Just as Chuck Csizmar explained in his recent post about comparing salaries across different countries by converting currencies, global salary budgeting needs to be done country-by-country, and taking a shortcut like the one described above is a recipe for disaster.   Here’s why.

Market Movement Varies by Country
The primary information used by HR and finance to determine salary budgets is market movement (this is a measure of how much salaries increase from one year to the next, usually from surveys) and internal economic assumptions (basically, how much can the company afford?).

Suppose your US-headquartered company decided to apply the US salary increase percentage to all of your markets overseas for a five-year period.  The graph below compares the average increases over the five-year period ending in 2008 for selected markets.

Average Pay Increases

As you can see, the average increase amounts vary a lot by market.  The difference compared to the US ranges from 7.1% (India) to almost 20% (Nigeria).  At the same time, the average in Europe is below that of the US. And that’s just comparing the averages for one year.  If you looked at the cumulative effects with compounding over the five-year period, the differences grow dramatically.

OK, I get it.  I need data for each market.   I’ll just use inflation.
Inflation data is fairly easy to get on a global basis.   You can usually find it for free on various websites, and your local finance folks will certainly have some figures for you to use as well.   They use inflation to budget price increases for your products and to anticipate the impact of price increases in raw materials and other costs of doing business for the upcoming year.   And of course, official inflation figures are produced by the government of each country in an unbiased and apolitical fashion, right?   But what does inflation, or cost-of-living, have to do with salaries?

Cost of Labor is What Matters!
Setting salaries is affected by many factors.  The absolute level of pay is certainly influenced by cost of living – countries with higher costs tend to have correspondingly higher salary levels.  But the main factor affecting salary increases – the one that drives the market movement each year – is an old rule from Economics 101. Three words.  Supply and Demand.   If you are recruiting for positions with hot skills, for example, and there is a shortage of these skills in the market, don’t you end up paying more for these recruits?  If there is high unemployment or an excess of qualified candidates, and positions are easy to fill, isn’t there considerably less pressure to raise salary levels?

Can I just use devaluation instead?
Short answer?  Nope.  Local employees are paid salaries set in local currency, and obtain their everyday good and services in the local market, in local currency.   Devaluation (or revaluation) defines the relationships between the currencies of different countries, usually with a reference to a “strong” currency such as US Dollars, Euros, Pounds Sterling or Yen.   Exchange rate changes do affect the price of goods, for example, especially imports or imported raw materials.   But these fluctuations do not fundamentally affect the cost of labor in a country.  Remember, also, exchange rates are sometimes controlled by governments to achieve other objectives.   Hardly a reliable measure of anything, really.

The Best Approach
To estimate your salary budget properly, you need to obtain data for market movement in each country, and analyze it in the context of your own organization’s situation (market position, health of the business, funds available for increases, etc.).   There are many sources for market data – everyone has their favorites (hopefully some of you are using Birches Group data).  And then you have to apply something no statistic or consultant can provide – your own judgment – to determine the right figure to use in your company.  Interpretation and analysis of the data and applying it to your company’s situation is the art of compensation rather than the science.


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Can’t You Just Convert the Currency?

Posted on August 10, 2009 by | 9 comments

Chuck Csizmar – CMC Compensation Group

It is human nature to look for simple solutions to perplexing problems.  Simple avoids confusion, keeps you “on message” and helps create greater employee awareness and appreciation of programs and policies. However, when you are dealing with the diversity and complexity of international compensation it is just not that easy – nor should it be.   For those seeking the simple life it can be difficult to understand and accept that each country operates in a different environment from the next.

Perhaps because of its long history of isolationist tendencies, or perhaps due to a bit of Yankee arrogance, but US managers tend to struggle with the challenge of this concept more than other players on the global scene.

For the most part US Managers do not want to hear that pay levels in Finland, or Argentina or Tunisia are different from the US.  They would rather treat everyone the same, call it globalization and consider themselves a one-world player.  Many push an agenda of simplicity that is in fact a misleading distortion, will be a costly strategy to implement and its results will more than likely irritate key talent within their workforce.

Consider the senior manager who simply wants to convert a foreign national’s salary into US dollars – based on a concern with what they call “internal equity”?  The assumption is that everyone pays approximately the same for an “XYZ Manager”.

Other considerations:

  • If simple conversion was a viable approach, why do we not see such formulae prominently displayed by salary survey providers?
  • Employees will be skeptical of the simplistic approach, as in their mind too many local realities would be ignored in favor of what is perceived as the Company somehow saving money
  • Lacking a strong correlation you will either needlessly increase your compensation costs, or under-value your employee talent and risk disengagement – or worse

I once developed a formulaic approach that explained to a COO why he could not (should not) establish internal equity between the US and the UK by simply converting GBP into USD.   I factored in a host of elements, including local taxation, competitive pay levels, incentive practices, cost of living, required social charges, benefit costs, etc. to make my case.   My point was that a simple conversion would be a distortion of the economic realities that drive pay levels in both countries.

Sad to say, but the explanation was ignored and the COO, though he acknowledged the logic of my argument, continued to prefer a simple conversion to establish relative values in his own mind.

To operate successfully on a global basis management needs to understand, to truly believe that each country operates like a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 comparison with any other country a distortion that will cause you to either over spend or under spend your reward dollars.  Either result should be avoided.

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But . . . We Already Pay Competitive Wages!

Posted on July 16, 2009 by | 1 comment

Author:
Chuck Csizmar – CMC Compensation Group

What doesn’t happen when your company pays competitive wages?

You’ve read your company’s want ads and heard the pitch from your recruiters; you offer competitive wages to qualified candidates.  That’s got to be a strong hook for attracting talent, right?

Big deal.

You regularly update your country-specific pay structures based on market trends, so the opportunities you offer your employees should support your retention and motivation strategies, right?

Not enough.

Most employees presume that your company is already doing or aspiring to meet the goal of competitive pay.  After all, companies routinely advertise the practice (“we offer competitive wages”) and candidates in return expect this of potential employers.  But what happens when your goal of offering competitive pay is finally achieved?  Are employees pleased and content?  Can companies rest in their efforts to attract, motivate and retain?

I’m afraid not.

When in a situation where they’re not paying the “going rate”, management fervently hopes that employee challenges and criticisms will disappear once they reach that difficult-to-achieve target.  I say difficult because it’s not only an illusion but an expensive problem if you have a large body of underpaid employees.  And once you climb that mountain, well . . . so what?

What doesn’t happen when you offer competitive pay is that your recruitment problems have not magically disappeared, your employees won’t be satisfied and your compensation program has achieved nothing more than being average – and isn’t that a “C” grade in school?  Is that where you want to be?  Is that a practice that ensures your employees will be content to stay with you?  As far as aspirations go, it’s only middle-of-the-road.  You will find that it is not an advantage to pay the going rate, but it is definitely a disadvantage if you don’t.

Even if your company does pay “the going rate” or the norm or the competitive average (what the survey data shows), that means that approx. 50% of the companies out there are paying *more* than you.  That’s what average gets you, with half doing more and half doing less.  Is that what your company aspires to achieve?

Remember, no one leaves your company for less money – so all you’ll hear from your employees is about how so-and-so is making more money somewhere else.  And of course, employees only hear what supports their own notions – so they wouldn’t pay attention to the whole rewards package, just the specific components that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is if you become the premier paying company in your market / industry – and can you afford that cost?

Lest we forget, it is important to differentiate between having a salary structure (grades, salary ranges and midpoint) that provides competitive rate “opportunity” and actually paying employees at those rates.  Some may describe this as whether the company is “walking the talk”.  I recall a client who boasted that their salary range midpoints were continually adjusted to mirror market rates, but later was embarrassed to discover that their actual pay practices delivered pay levels well below their own published midpoints.  However, it did help explain the high turnover and low morale.

For their part, employees will relate to what they are being paid, not the midpoint of a salary range or other such declared “opportunity”.  To them the company’s supposed “competitiveness” is more illusion than fact; especially if they’re experienced and have been with you for awhile.  Thus the company needs to keep its focus on actual pay vs. opportunity pay.

Why do employers fail to pay the “going rate”?  Typically it is not a strategy, but a series of practices that have evolved over time.

  • For various reasons some candidates will accept a lower rate than should normally be paid for their knowledge and experience, and managers tend to view this as good news and a cost savings.  In fact it is more like putting a skeleton in the closet and hoping it doesn’t haunt you later on.  One day these same employees will change their minds.
  • Once you’ve started down the slippery slope of paying some employees below market rates the practice is soon compounded by the well-intentioned practice of internal equity.  Managers don’t want to pay similarly qualified new people more than existing employees, so the new hires are offered either below market pay or placed inappropriately in higher value jobs to get them more money (a different problem for another article).
  • Pay-for-performance systems have a hard time keeping up with the increased marketability of employees.  A minimally qualified employee hired at the minimum rate will gain knowledge and experience (and thus marketability) faster than a company’s annual merit system can recognize.  This is compounded when you have to hire a qualified worker and discover that the market requires you to pay more than what you’re paying your more experienced employees.

So, what’s the answer?  You likely won’t find management agreement to become the premier payer in your area, so you should consider instilling some flexibility into your pay practices.  You should consider targeting certain key jobs in your organization (highly skilled, difficult to replace, etc.) and make sure those jobholders are well paid for the market.

Other positions that are not as skilled and more easily replaceable you could continue with your “competitive opportunity” strategy.  Any losses would be more easily absorbed.  This approach is somewhat akin to ring-fencing your key talent, protecting them against poaching while recognizing / rewarding those with the most potential impact on your business.

So be careful when you proudly claim how your company provides competitive wages.  You may not be correct, and if so – big deal.

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What’s In A Title?

Posted on June 28, 2009 by | 9 comments

Author:
Chuck Csizmar – CMC Compensation Group

I once faced a client situation where I was asked to uncover why a Senior Accountant (non-exempt) reported to an Accountant (exempt).  This same company used the title “supervisor” to describe individual contributor positions and it was not uncommon for Managers to report to Managers and Directors to report to Directors.

Given that these situations occurred in a large and presumably sophisticated company, one might ask – is there really a problem here?  What’s the big deal, and is anyone being harmed?  Advocates would say that offering an employee a special title is a harmless and inexpensive reward, one that doesn’t raise employer costs.  It also improves the morale of affected employees.

Where do these scenarios come from?

  • Managers grant esoteric titles to those for whom they have limited means of reward.  “They won’t let me give you the salary increase I think you deserve, but let’s change your title to xxxxx”.  Like greasing a squeaky wheel for a short term fix they want to do *something* to keep the employee quiet / motivated / not thinking of leaving.
  • Employees are given job opportunities (titles) where none should exist.  Have you experienced the long serving Secretary / Administrative Assistant promoted to the newly created role of Office Manager, all while performing the same job?
  • As a salve to employees a “special” title is used because somehow the position (usually clerical) is considered so different from other jobs that it needs to be specifically identified.  Special titles can also be seen as reflecting on the importance of the managers themselves.

In my experience it is usually those in management who consider themselves “above the fray” who do not see title inflation (puffery) as a problem.  Interestingly enough, that level of management can be severely put out if the same title giveaway happens within their hierarchical level.

At the risk of being called Mr. Gloom & Doom, let me explain the type of harvest that you can expect from planting these problem “seeds”.

  • Role clarity (job duties, business impact, decision-making, etc.) behind questionable titles will become blurred.  This in turn would generate more confusion as the company creates Senior Managers and Group or Area Directors and other in-between titles in the hierarchy to differentiate the “real” jobs from the inflated titles.
  • When attempting to determine the competitiveness of your positions the less accurate the title is in relation to the work performed, the more likely your analysis will be skewed.  Benchmarking unique, employee-specific and inflated titles will make a correct assessment of your competitiveness more difficult.  This could have real cost impact.
  • Those with inflated titles will expect whatever perks or privileges that normally accompany the title and their absence could cause difficulties.  It’s an awkward conversation when you tell an employee that the import of their new level in the organization is “title only”.
  • Inflated titles can be a detriment to incumbents as well, such as the “Director” who now only qualifies for a “Manager” title with a prospective employer.  These employees have limited opportunities outside your company because other employers would be reluctant to hire someone where the title is lateral or even backward to what they currently hold.  The result could be that mediocre performers remain with your company because they have no where else to go.
  • The natural extension of inflated titles is inflated grades / salary ranges, as the bogus “senior” position would be placed in a higher grade than the “intermediate” position, right?  This practice will gradually increase your fixed costs without a corresponding rise in either performance or capability.
  • Some employees legitimately find themselves in a dead end job, and granting them a cosmetic title as a salve doesn’t help anyone.  Lead or supervisory mail clerk?  Or the “supervisor” that no one reports to?
  • Employees do not like giving up these inappropriate titles.  Thus employee relations / morale issues will likely develop if you try to correct poor past practices.  You may have to develop creative “buy out” scenarios or grandfather employees.

If you are in a situation with inflated, redundant and confusing job titles, what steps can improve your lot?

  • Organize a Spring cleaning exercise:  start with the low hanging fruit by eliminating (deleting from your systems) all titles that are unoccupied.
  • To avoid backsliding you should accompany that initiative by implementing tighter procedural requirements necessary before a “new” title can be authorized.  While perhaps only a finger in the dike or closing the barn door after the horses have left, you must cut off the flow of new problems before you can effectively address the core issue of incumbents.
  • The company would need fewer job descriptions if the wording was more generalized.  Standardized titles would clear away much of the role responsibility confusion while clarifying an employee’s duties.

Especially in clerical positions, the general nature of duties for most positions (filing, record keeping, secretarial, forms processing, correspondence, etc) lends itself to standardization – which in turn makes it easier to move employees from position to position without having to “promote” someone when their title changes.

Bear in mind though, that title standardization makes more sense in a conference room than it does during an employee discussion.  A “Senior Depository Research Clerk” will always sound more important than a “Clerk III” or even “Senior Clerk”.

Companies try to reduce the number of titles whenever a new HRIS is established (that’s usually when the huge number of active titles becomes widely known).  Anyone who has been exposed to the process of implementing an HRIS (SAP, Peoplesoft, Oracle, etc.) will tell you that job title standardization is a key component of the project.

However there is always a degree of passive resistance when individual leaders realize that *their* area is being cleansed of superfluous / redundant / misleading titles.

Fewer titles can mean more role clarity in your organization, greater accuracy in assessing pay competitiveness, more control of labor costs and indeed higher morale as employees know where they stand and what they must do to succeed in your organization.

A final caution: be careful of setting up titles without occupants “in case we want to promote someone down the road.”   Guess what?  You will.

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